In a letter to the prime minister, Mr Mates said he had done nothing wrong, but had decided to step down from government in the interests of the Conservative Party.

He said he wanted to halt the tide of damaging leaks and allegations about his association with Mr Nadir, who fled to Cyprus rather than face fraud charges in the UK connected with the collapse of Polly Peck, the star London stock market performer of the 1980s.

The resignation was prompted by a newspaper's publication of a letter written by Mr Mates to the attorney general, in which he complains about the way in which the case of Mr Nadir - a major Tory donor - has been handled.

'Not a hanging offence'

Prime Minister John Major, speaking in the Commons, said he had accepted his minister's resignation "with regret".

Mr Mates' troubles began in late May, when it emerged he had given a watch to Mr Nadir bearing the inscription, "Don't let the buggers get you down".

Mr Major played down the significance of the watch, and said it was "not a hanging offence".

But subsequent newspaper reports linked Mr Mates with a PR man of Mr Nadir's, and it was revealed the minister had borrowed a car from one of the fugitive's advisers.

Only two days ago Mr Mates was vowing defiantly to stay in his post, claiming he had the confidence of the prime minister.

But the publication of his correspondence with the attorney general seems to end his hopes for political survival.

In his letter of resignation, Mr Mates wrote: "The daily leaking of letters and so-called quotes from unknown sources - most of them wildly inaccurate - is causing such cumulative damage... that I must do what I can to bring it to an end. I therefore wish to go."

It is understood Conservative backbenchers had become restless at the way the embattled minister was becoming a distraction from the work of government, and many were pleased at his decision to step down.

In Context
Michael Mates was the third minister to leave government despite having been supported by Prime Minister John Major.

But Mr Major had learned lessons from the departures of Norman Lamont and David Mellor and was careful not to associate himself too closely with Mr Mates.

The outgoing minister had been appointed to the Northern Ireland office following the 1992 general election - his first government post in nearly 20 years as an MP.

He led the Tory rebellion over the poll tax and played a key role in the toppling of then prime minister Margaret Thatcher, making him enemies among some Conservative MPs.

Mr Mates was re-elected MP for East Hampshire in the 2001 general election.